Term Sheets Explained for Startups
Term sheets don’t have to be intimidating. This guide walks through the main clauses and how to negotiate them fairly.
A term sheet sets the economic and governance framework for an investment. Understanding the key terms empowers you to negotiate fairly and avoid clauses that can hurt you in later rounds or exits.
Valuation and round size. Pre-money valuation and the amount raised determine ownership. Option pool size is often negotiated; a large unallocated pool can dilute founders. Standard practice is to agree on a fully diluted pre-money that includes the new pool. When you’ve secured interest—whether from the Arena or from a process—valuation and size are the first levers to align on. Round size should match your milestones: 18–24 months of runway to the next inflection point is the usual target. Don’t over-raise “just in case”; it dilutes you and can create pressure to deploy capital in suboptimal ways.
Liquidation preference. Preferred investors get their money back (or a multiple) before common shareholders in a sale. 1x non-participating is founder-friendly; participating preferred or multiples can significantly reduce founder upside. Push for standard terms where possible. In a 1x non-participating world, after the preference is paid, remaining proceeds are shared pro rata among all shareholders. Participating preferred means the investor gets their preference and then shares in the rest—double-dipping. Avoid it at early stage unless you have no choice.
Board and control. Board composition, protective provisions, and voting rights matter. One seat for the lead investor is common; avoid giving a single investor veto over day-to-day decisions. Keep governance clean so future investors and our Network see a professional setup. Protective provisions (e.g. consent required for new preferred, sale of company, change of certificate) are standard; just make sure they’re not so broad that they block normal operations. Reserve matters for the board, not for a single investor.
Anti-dilution. Broad-based weighted average is standard and founder-friendly. Full ratchet is harsh and worth resisting. Understand how down-rounds would affect you before you sign. With weighted average, the adjustment to conversion price is proportional to the size and price of the down round; with full ratchet, the investor gets as if they invested at the new lower price—very dilutive to founders.
Other terms. Pro-rata rights, information rights, and vesting for founders are standard. Read everything, and get a lawyer who knows startups. A fair term sheet protects both sides and sets the company up for the next round. Use our Shop to rep the brand once you’ve closed—then get back to building.